The Jordan Co. has been active in China long before most U.S.-domiciled PE firms could pinpoint Fooshan City on a map. The firm has seen the opportunity set change, evolving slowly from low-cost labor to a vibrant and burgeoning market into which companies now want to sell. Quinn discusses how Jordan Co. established its presence in China, and provides an outlook on where he sees the market moving over time.

Mergers & Acquisitions: Tom, you've been in China for a while now. Could you discuss the history of Jordan Co. in the region and what initially drew you there?

Quinn: We started in China back when people would still say that they admired our courage for going there. It's been a long time. We started in 1994 and completed our first transaction in China in 1995. It was a boot-strap, greenfield startup that manufactured a product associated with another company we owned. We completed another acquisition that same year that related to telecom components, which did well, and since then we've done about 22 transactions in China.

We're a private equity firm headquartered in New York, so most of what we do there is centered around supporting the U.S.-based companies in our portfolio. Early on it was about accessing low-cost labor, but our goal now is to sell into the country and access China's population of 1.4 billion people. Our strategy has changed to the point that I'd say 80% of activity is done to gain access to the market.

Mergers & Acquisitions: You make it sound easy, but I imagine there's a lot more to it. Could you describe Jordan's approach to the region?

Quinn: We have a fairly sizeable facility in Shanghai, which serves as an administration office for our M&A group. Youming Ye was the first person we hired there — he's a managing director who's in charge of M&A for all of our portfolio companies. If there isn't anything worth acquiring, we'll also consider launching a startup. We just did that for our sensor metering business. And every once in a while, we'll make a separate platform investment in the country.

We also set up a sourcing group in Shanghai that works with the portfolio companies to figure out what they need in terms of manufacturing help, and they'll perform all of the work behind that. It's pretty much a turn-key operation, so our domestic managers don't have to spend their time traipsing around China trying to figure out how to do business there.

In Beijing we have an operations management group, headed by Allen Chan. He has been with us for a couple of years and his role is to help Westernize our Chinese companies as best we can. We've found that a lot of companies are starved for help when it comes to adopting Westernized management and business practices. Allen, who is a Chinese national, spent most of his career at GE, so he can come in and add value immediately.

Mergers & Acquisitions: Can you provide an example in which Jordan was able to come in and retool the business?

Quinn: We've done about four or five deals for state-owned-enterprises. They can be very difficult to buy. They're certainly not as Westernized as one might like. But we did find an interesting deal that we closed about two years ago — it took us about three years to actually complete it.

The Heilongjing Province wanted to sell a coal mining equipment business. It was a profitable company, but they wanted to sell it so they could have a Western operator come in and run the business.

You only hear about the big companies, the top 100 or so government-owned companies, but there are literally thousands of state-owned enterprises that are run by their respective provinces. We largely won the deal because we've been in China since 1994 and have built up a strong track record. But it took a couple years to get through the negotiation process. It's not because it was contentious, but, rather, because they hadn't ever worked through a contract before.

Mergers & Acquisitions: Was the effort worth it?

Quinn: Well, we've added onto the platform with three acquisitions since then, and just signed an LOI for the fourth. We control 100% of the company, which is unusual, and it's grown every year that we've owned it.

Mergers & Acquisitions: What kind of opportunity do you see among the state-owned enterprises? I've always been under the impression that those businesses are difficult to invest in.

Quinn: There are something like 180 blue-chip state-owned companies, which are controlled by the central government. Those are the ones that you're seeing a lot of the big private equity firms going after. We try to stay away from those. On the other hand, there are thousands of other state-owned properties that are controlled by the various provinces.

But you still have to bring something to the party. You have to bring capital, but there's a huge amount of money already in China, so you have bring something else. In our case it's been operational know-how. In a lot of cases, we've helped companies develop Western methods of manufacturing. We take it for granted in the U.S., but there's a lot of value in implementing things like lean manufacturing, six sigma, et cetera, or even Western methods of marketing and sales or logistics. We'll also help put controls in place, and make sure businesses are complying with GAAP.

Mergers & Acquisitions: One of the deals that you hear mentioned anytime you talk about private equity in China is Carlyle's attempts to buy Xugong Construction, the state-owned construction company. By most accounts it seems like China is remiss to part with the assets. Have you had any trouble as it relates to control investments in the country?

Quinn: Everyone has their own theory about the Carlyle deal. In general we like to keep the "private" in private equity. It's usually not in our best interest to publicize what we're about to do.

As it relates to control, most of what we've done has been 100% control deals. There have been a couple instances when we've had a partner, but generally speaking we're not good minority investors. We're good partners, but we like to have control because we're trying to bring value.

Mergers & Acquisitions: What's the opportunity for private equity outside of the state-owned enterprises?

Quinn: Over the past ten years, there's been a tremendous amount of investment in new companies coming from entrepreneurs — it's been fueled by a 46% savings rate in China. There are roughly four million companies that will someday be for sale. I'd venture that 10% of those are already fairly well managed, and the rest will improve over time. If you're a Western company, and you can bring business know-how, it presents a tremendous opportunity.

We'll also go into harder-to-reach areas. It's easy to get people to go to Beijing or Shanghai, but it's much more difficult to attract people elsewhere. It's those other places where we can come in and add value, and help those areas spread the word about the opportunities.

Fooshan City, for example, is a place where we've invested. And every three years, the Mayor and other party officials will come to Chicago, and our group will work with them to put on a seminar about doing business in China. That means a lot to them to be able to come over here and find new business opportunities.

Mergers & Acquisitions: Considering you've been in China for almost 15 years, can you describe the changes you've seen?

Quinn: The change in infrastructure has been mindboggling. The first time I went to Fooshan City, an old port-town, it was basically all dirt roads that were being raked by people on bicycles. Now, it looks like New York City. The port is absolutely beautiful.

It used to take six days to go from Fooshan City to Shanghai. Now it takes about a day and a half. It's funny. You'll be driving on an eight-lane highway that's been open for about a week, and there will be bumper-to-bumper traffic. It makes you wonder where everyone came from and how they got around the previous week.

Mergers & Acquisitions: Considering the growth of the market, is there any threat that China's economy could be impacted by what's going on in the U.S. and Europe?

Quinn: The old saying was if the U.S. sneezes the rest of the world catches a cold. But in my opinion, it's not like that anymore. I believe that the economies have decoupled to some degree.

The balance of trade is misleading. In truth, only about 6% of jobs in China are related to the export market. If the U.S. economy falls off by 50% that would only take China's GDP growth down by about a point. And China showed growth of about 10.5% in the first quarter.

I don't think China will be hurt because of a U.S. real estate bubble. But China does have its own issues. There are a couple hundred thousand people who are still underemployed. I think the country would like to see more investment move inside of the country as opposed to just on the coast. And inflation has been up a bit, so I think they would like to take that down. At the same time, I don't think China's fortunes are hinging on the U.S. or Europe.

Mergers & Acquisitions: When it comes to making investments, what are some of the more notable changes you've seen in China?

Quinn: Well, prices have gone up for companies. You used to be able to buy a business for three to four times cash flow. Those were the old days.

There also used to be tax holidays for foreign investors. There'd be something like two to three years with no taxes. For the most part, though, that's gone.

Mergers & Acquisitions: What about rules and regulations? There was some recent legislation regarding antitrust. What kind of impact does that have? And on the whole, is it tough navigating the Chinese market?

Quinn: It can be difficult. There are new rules and regulations coming down all the time that have to be interpreted. The more time we spend in China, the more we realize that it's a complicated place.

Our view is that China still wants Western investors. There are some things coming down the line that could make it more difficult to do business. There's the anti-monopoly law you mentioned, and China is becoming more aggressive when it comes to protecting brands and industries. But it's not much different than in the U.S., where you had the Senators step in and interfere with [the potential acquisition of Unocal by CNOOC].

On the positive side, though, we think there will be some legislation introduced that should make it easier to raise a renminbi-denominated fund. That could be a big boost for foreign capital.

And, overall, I'd say that most of what we're seeing is pretty positive, actually.

Mergers & Acquisitions: You talked earlier about targeting the Chinese market. How do you do that exactly? I can see how great the opportunity is, but it seems difficult to step in and immediately start lining up new business.

Quinn: I'll give you an example. We have a business here in the U.S. that's No. 1 in elevator motors. It doesn't take a Rhodes Scholar to figure out that China represents a big opportunity for elevator motors and controls. So about three and a half years ago we decided that we wanted sell into the market.

Some investors might go over there and say, "We'll do it the same way that we do it in the U.S." That will get you a whole lot of nothing. So we studied the market, looked at the various channels of distribution, and really scrutinized what their decisions are based on. They have different needs, so we'll use our technology and invest in China and try to address specifically what they're looking for.

I just got back from China, actually. And while I was there, I went to KFC for lunch. I had a local sandwich that was unlike anything you'd ever find at a KFC in the U.S. It wasn't bad. It was just different. You have to sell what people want and that takes research and time.

To go back to the elevator motors business, we now have a 25% market-share in China and we just executed a deal to buy an elevator controls business there.

Mergers & Acquisitions: A lot's been made about the IP threat in China, whereas it can be difficult to keep intellectual property under wraps.

Quinn: The businesses we invest in aren't generally about having great patents, so it's not really an issue for us. But my observation would be that it's an opportunity for improvement. It's getting better every day, but the government has a difficult job. There are a lot of people and a lot of entrepreneurs, and to get everyone to toe the line in China is no easier than anywhere else.

Mergers & Acquisitions: What about product quality? A lot has been made in the mainstream press here about the lead contamination in toys that were manufactured in China.

Quinn: In my opinion China has made for a good whipping boy. They're an easy target and they can't really defend themselves against these kinds of attacks. The lead exposure, to my understanding, turned out to be Mattel. And a lot of the cases that I've read about, the manufacturers are making products to the specifications they're provided with.

From what I've seen, Chinese manufacturers make every effort to have the same kind of quality controls in place that you'd find anywhere else. They're just as tough and just as thorough, and we've never had a problem. What might happen, though, is that some manufacturers will say they can do something when they can't, but their intentions are good.

Mergers & Acquisitions: Now the Olympics seem to underscore both the opportunity in China as well as some of the backlash that the emergence of the country seems to provoke. The torch relay, for instance, has been marred with countless protests worldwide. What are your thoughts on this, and does it impact at all the thesis behind what attracts you to China?

Quinn: The Beijing Olympics is very exciting. The architecture is stunningly beautiful and China will be very well prepared. It's amazing, really. Beijing is immaculate today. It shows how quickly the government there can get things done.

If you're talking about Tibet, I would say that it's a complicated issue, and I'm not sure that I have the moral prestige to comment either way. One thing I will say, though, is that there were 34 people shot in the Chicago projects over the weekend, so it's pretty clear we have our own human rights issues. And I'm not sure when a wheelchair-bound torch-bearer gets attacked in France, the protestors are doing much to help their cause.